The Real Shortcoming of the UK Cartel Offence: A Lack of Public and Political Support

Transcription

1 Global Antitrust Review The Real Shortcoming of the UK Cartel Offence: A Lack of Public and Political Support ELÉONORE MAY MICHELS* The UK introduced a cartel offence to strengthen deterrence of the cartel prohibition and to send a message that cartel participation is morally wrong. However, due to a lack of public and political support, the offence did not achieve the desired deterrent effect. The original cartel offence failed to recognise that there is not yet a common belief that cartel participation is wrong. While the 2013 amendments removed the dishonesty requirement in an attempt to facilitate prosecution, the defences that were put into place are so easily met that liability can easily be avoided. The defences portray a continued lack of political support. The harm and moral wrongfulness of cartels should be emphasised to strengthen public and political support. I. Introduction This article argues that the criminalisation of competition law in the United Kingdom (UK) has failed due to a lack of public and political support. The fines imposed under the civil administrative system are inadequate to effectively dissuade companies from colluding with their competitors. The manipulation of the London Interbank Offered Rate (LIBOR) by UK and international banks 1 and the signs of potential collusion between the big six energy providers in the UK 2 suggest that for companies in two of the largest sectors of the UK economy, the risk of enforcement is outweighed by the expected benefits of collusion. * L.L.M (UCL). 1 Michael Kobelenz, Kenneth Labatte and Carrie Turner, LIBOR: Everything You Ever Wanted to Know but Were Afraid to Ask (2013) The Journal of Business, Entrepreneurship & The Law Michael Kavanagh, Competition watchdog to investigate energy prices Financial Times (24 July 2014) < feabdc0.html#axzz3BssEErPm> Accessed 24 July 2014.

2 The real shortcoming of the UK cartel offence 54 Criminal sanctions for individuals who engage in the making and carrying out of cartel agreements can greatly add to deterrence by way of introducing a risk that companies cannot financially compensate for. 3 Furthermore, by emphasising the moral wrongfulness of the behaviour, criminal sanctions can ensure greater compliance with the prohibition against engaging in cartel. If the harm and moral wrongfulness of the cartel conduct would more widely be understood, more people may refrain from participating in cartels, because (i) they do not want to break a moral norm, or (ii) they fear social condemnation and alienation resulting from breaking a moral norm 4, or because (iii) individuals estimate the risk of detection and prosecution to be higher when they agree with a law and its application to them. 5 The UK government introduced a cartel offence in 2002 to strengthen deterrence 6 and to send out a moral message that cartel participation is wrong. 7 However, the deterrent effect of the cartel offence is undermined if there is no public and political support for the offence. This article begins with analysing why sanctions should be introduced for individuals and argues for morality to play a central role in justifying those sanctions. In the second part the article critically evaluates why the original cartel offence that introduced in 2002 had failed in practice. The third part is devoted to portraying the fact that the underlying problems of the cartel offence are a lack of public and political support for the offence. In this regard, the article describes how the recent amendments to the cartel offence are the epitome of a lack of political support. The article stresses the need for an agreement with the law governing cartel offence, drawing lessons from a comparison to the insider dealing offence. It suggests that support can be strengthened by emphasising the harm and moral wrongfulness of cartel conduct. II. Justifying sanctions for individuals 1. The reasons why sanctions for individuals should be introduced a) The inadequacy of corporate fines 3 Stuart M. Chemtob Antitrust deterrence in the United States and Japan (Competition Policy in the Global Trading System, Washington DC, 2000) < Accessed 15 July Andreas Stephan, The Battle for Hearts and Minds : The Role of the Media in Treating Cartels as Criminal in Caron Beaton-Wells and Ariel Ezrachi (eds), Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart Publishing 2011), Caron Beaton-Wells and Christine Parker, Justifying criminal sanctions for cartel conduct: a hard case [2012] Journal of Antirust Enforcement 1, Angus MacCulloch, The cartel offence and the criminalisation of United Kingdom competition law (2003) Journal of Business Law 616, Anthony Hammond and Roy Penrose, Proposed Criminalisation of Cartels in the UK (Report prepared for the OFT, November 2001), paras

3 Global Antitrust Review Cartel agreements between undertakings, including price-fixing, output restrictions, market sharing and bid-rigging agreements, are prohibited at EU level by Article 101 Treaty on the Functioning of the European Union (TFEU) and at national level by the Chapter I prohibition of the Competition Act 1998 (the Act), unless the agreement is exempted by Article 101(3) TFEU or section 9 of the Act. Exemption is highly unlikely for hard-core cartel agreements. A fine is imposed if an undertaking is found to have breached the prohibition. The fine is meant to deter and to punish. 8 It punishes the undertaking for violating the competition rules, aims to recoup the unlawful gain that it made from its violation, and seeks to send out a moral message that the behaviour is wrongful. 9 The deterrence function is both individualistic and general. The prior form seeks to prevent recidivism, while the latter aims to discourage other undertakings from infringing the competition rules by creating a credible threat of penalties. 10 The general deterrence theory presupposes that undertakings are rational economic actors seeking to maximise their welfare, 11 who weigh the costs and benefits of a particular act in order to decide whether or not to engage in it. Accordingly, a calculating undertaking considering cartelisation can be deterred from breaching the prohibition, if the expected fine, taking into consideration the probability of detection and enforcement, exceeds the expected gain. 12 For fines to have a general deterrent effect, they should therefore be set at the level of the expected gain multiplied by the inverse of the probability of detection and enforcement. 13 Where the expected fine outweighs the expected benefits, companies will have a greater incentive to implement effective compliance programmes. 14 The idea is that any failure to do so would be met with be met with shareholder outrage and a demand for new management. 15 However, corporate fines are at present not sufficiently deterrent. As the probability of detecting a cartel is relatively low, approximately 16%, 16 cartel fines 8 Case T-329/01 Archer Daniels Midland v Commission [2006] ECR II-3255, para Wouter P. J. Wils, Optimal Antitrust Fines: Theory and Practice (2006) World Competition 183, Donald I Baker and Barbara A Reeves, The Paper Label Sentences: Critiques (1977) Yale Law Journal 619, Cento Veljanovski, Economics of Law (2 nd edn, IEA 2006), Wils Optimal Antitrust Fines (n 9). 13 Ibid, Maurice Stucke, Morality and antitrust (2006) Columbia Business Law Review 443, Ibid. Although the ability of shareholders to effectively demand a change in management is questionable, even at an optimally deterring fining level, as shareholding may be dispersed and/or indirect. 16 Wouter P.J. Wils, The Optimal Enforcement of EC Antitrust Law: Essays in Law & Economics (Kluwer Law International 2002) 201.

4 The real shortcoming of the UK cartel offence 56 would have to be very high to have an effective general deterrent effect. Wils has estimated that fines would need to be set at 150% of the undertaking s annual turnover in the cartelised good. 17 Similarly, the White Paper that preceded the introduction of the UK cartel offence found that fines would have to be increased by a factor of six to ten to be truly deterrent 18. They may need to be even higher due to optimism bias, as Weinstein found that people generally tend to be overoptimistic in assessing their personal risks. 19 Such high sanctions are unlikely to be imposed, as they would in most cases exceed a company s ability to pay and force them into liquidation. This would cause many undesirable side effects including job losses, devaluation of securities for creditors, 20 and competition in the market would ironically be reduced rather than improved with the exit of the company. Fines are therefore currently capped at 10% of the turnover of the undertaking at national 21 and EU level. 22 However, at this lower level corporate fines are not effectively deterrent and fail to create adequate incentives for companies to ensure that their employees respect the competition rules. Nor are the fines sufficiently punitive. From a punitive perspective the fine is meant to send a strong message that cartel conduct is wrongful and will not be tolerated. However, if the current fining level is too low, so that the expected fine does not outweigh the expected benefit, the sanction may be regarded as a tax as opposed to a punishment. Consequently, rather that signalling that cartel conduct is unacceptable; it implies that the conduct is permitted provided that the tax for it is paid. 23 There is, therefore a broad consensus that corporate fines alone are not enough to deter cartel conduct. 24 b) Prison sentences for individuals will add to deterrence Sanctions for individuals should be introduced to strengthen deterrence 25 and punishment. Such sanctions should not be limited to fines, as these are easily 17 Ibid. 18 Department of Trade and Industry, A World Class Competition Regime (Cm 5233, 2001), para Neil D. Weinstein, Optimistic Biases about Personal Risks (1989) Science 1232, Wils Opitmal Antitrust Fines (n 9), Competition Act 1998, s 36(8). 22 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, Article 23(1). 23 Gregory Werden and Marilyn Simon Why price-fixers should go to prison (1987) The Antitrust Bulletin 917, OECD, Cartels: Sanctions against Individuals (2003) < > Accessed 30 July 2014, Ibid.

5 Global Antitrust Review absorbed by the firm, 26 particularly where corporate fines are below the optimal level, as undertakings will have an incentive to participate in the cartel and reimburse any employee s cartel fine. 27 Preventing undertakings from refunding their employees is difficult, since such laws can be circumvented by either ex ante giving the employee a payment for the risk of a fine, or by ex post compensation through wage increases, 28 bonuses or promotions. Furthermore, as with fines for undertakings, fines for individuals risk being regarded as a tax, which would weaken the moral message of the sanction and thereby reduce its deterrent effect. Instead, non-indemnifiable sanctions for individual cartelists are needed to supplement corporate fines. Prison sentences significantly increase general deterrence, as to the businessman prison is inferno, 29 so that the introduction of a non-monetary cost into the equation 30 breaks down the conventional risk-award analysis. 31 They also carry a unique stigma, because the embarrassment of a prison term is much greater than a fine. 32 This is reinforced by the fact that prison sentences are also more newsworthy than fines. 33 The fear of criminal conviction and the possibility of incarceration should deter individuals from participating in cartel activity, or if they are directed by their managers, they should have a greater incentive to inform the competition authorities. 34 Anecdotal evidence supports the proposition that the fear of imprisonment adds to deterrence. Evidence collected in the Lysine cartel portrays that meetings were purposefully organised outside of the United States in an attempt to avoid the criminal sanctions of the US Department of Justice (DOJ). 35 Companies engaged in international cartel also often first apply for leniency in the United States. 36 In the UK, an Office of Fair Trading (OFT) survey found that 26 Arthur Linman, The Paper Label Sentences: Critiques (1986) Yale Law Journal 619, Peter Whelan, Report Examining the Desirability of Introducing Criminal Sanctions for Cartel Activity (2014) < Accessed 20 July 2014, para Stucke Morality and antitrust (n 14), Linman, (n 26), Chemtob (n 3). 31 Linman, (n 26), Richard Posner, Antitrust Law: An Economic Perspective (OUP 1976), Werden and Simon (n 23), Diana Guy, The UK s experience with criminal law sanctions in Cseres, Schinkel and Vogelaar (eds) Criminalisation of Competition Law Enforcement (Edwar Elgar 2006), Wouter P.J. Wils, Is Criminalisation of EU Competition Law the Answer? (2005) World Competition 117, Scott D. Hammond, Corner Stones of an Effective Leniency Program (ICN Workshop on Leniency Programs Sydney, 2004) < Accessed 1 August 2014.

6 The real shortcoming of the UK cartel offence 58 companies and lawyers regard criminal sanctions to be the most important sanction in achieving deterrence of competition violations. 37 c) Individual responsibility Criminal sanctions should not be regarded as merely a means of improving deterrence. They are appropriate in their own right, as they address the responsibility of the individual employee in setting up and maintaining the cartel, a factor that corporate fines are not directly concerned with. After all, individuals, not corporations, meet in hotel rooms to fix prices and criminal antitrust enforcement needs to personalise the crime to effectively deter future price fixing. 38 It is far more effective to discipline employees with criminal sanctions than leaving this to undertakings themselves. Companies can essentially only discipline their employees with a demotion or a dismissal. This is, however, not a very effective deterrent for employees who engage in price-fixing to deal with the pressures of their work, for instance as a means to meet profit goals, as they also risk demotion or dismissal for poor performance. 39 Moreover, they may even regard the risk of dismissal for poor performance to be greater than the chance of the adverse consequences of their secret cartel being exposed. For instance, when General Electric was involved in price-fixing in the 1950s, its executives were under significant pressure to reach financial goals and could expect to be fired for a failure to meet them. This motivated them to collude with their competitors. 40 A price-fixing executive may also be aware that it will take several years for the cartel to be exposed and prosecuted, by which time he may have already left. 41 Firms may even decide against disciplining employees found to have been engaged in cartel agreements, as it may be disruptive, embarrassing for those exercising managerial control, [and encourage] whistleblowers. 42 In the Virgin/BA passenger fuel surcharges case, Virgin s board decided against firing its most senior director 37 Whelan, Report Examining the Desirability of Introducing Criminal Sanctions for Cartel Activity (n 27), para Stucke, Morality and antitrust (n 14). 39 Wils, Optimal Enforcement of EC Antitrust Law (n 16), Maurice E. Stucke, Am I a Price Fixer? A behavioural Economic Analysis of Cartels in Caron Beaton-Wells and Ariel Ezrachi (eds), Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart Publishing 2011), Whelan, Report Examining the Desirability of Introducing Criminal Sanctions for Cartel Activity (n 27), para Caron Beaton-Wells and Brent Fisse, US Policy and Practice in Pursuing Individual Accountability for Cartel Conduct [2011] Antitrust Bulletin 277, 299.

7 Global Antitrust Review engaged in the collusion and publicly declared their full support for him. 43 BA not only retained an executive involved in the infringement, but even promoted him to the board of directors. 44 Distinct sanctions for individuals are also more adept at addressing and deterring principal agent problems. A principal agent problem arises in the cartel context, where an undertaking has not encouraged its employees to engage in anticompetitive conduct, or may even have discouraged them through compliance programmes, yet a rogue manager nevertheless does collude with its competitors on his own initiative. In these circumstances a fine should still be imposed on the undertaking in order to create strong incentives for the company to invest in ensuring that its personnel complies with the competition rules. 45, 46 Yet, a sanction for the individual cartelist would more effectively addresses the employee s personal responsibility and creates a greater deterrence for others who may consider fixing prices on their own accord. 2. Morality cannot be excluded from the cartel criminalisation debate Proponents of cartel criminalisation have mainly focused on the use of criminal sanctions for individuals to increase deterrence. The general deterrence theory has a consequentialist forward-looking view and focuses on punishing the infringer to deter others from breaching the rules. Fittingly, cartel conduct has often been described as mala prohibitum as opposed to mala in se. 47 Many authors therefore do not look back at what is morally wrong about the cartel conduct itself. Andreas Stephan, for example, regards the societal harm inflicted by cartels to be so vast that the use of criminal sanctions is justified to deter future harm. He thus asserts that criminal cartel offences should simply be accepted as a necessary tool with which to punish, and more importantly, deter harmful cartel conduct Alistair Osborne, Virgin boss caught up in BA price fixing case The Telegraph (14 July 2009) < Accessed 1 August Michael Peel, BA sales chief on price-fixing charge to join board Financial Times (28 November 2008) < fd18c.html#axzz3BssEErPm > Accessed 2 August Werden and Simon (n 23), Vindicating the firm in such a case may also compel other companies to further disguise their support for the cartel participation of their employees, so that they can benefit from the extra profits of price-fixing while avoiding a fine from the competition authorities, and simply let one of their employees take the blame. It would also be morally wrong for a firm to benefit from the extra cartel profits without having to pay a fine for breaching the competition rules. 47 Stucke Morality and antirust (n 14), Andreas Stephan, Why morality should be excluded from the cartel criminalisation debate (2012) New Journal of European Criminal Law 127, 127.

8 The real shortcoming of the UK cartel offence 60 The deterrent function of criminal sanctions for individual cartelists is indeed essential. However, as imprisonment necessarily curtails an individual s freedom, an essential human right, 49 I believe that a cartel offence should contain a backward looking element that addresses the moral wrongfulness of cartel behaviour in order to justify its intrusion of this fundamental right. Such an approach would respect the individual s autonomy and their separateness of person. Cartel criminalisation should adopt a hybrid approach between deterrence and retribution. Deterrence may be the reason that we seek to argue for the existence of a criminal offence, but other retributive justifications may also be important to justify why a particular individual is being held accountable, and explain the severity of the punishment. 50 Moral opprobrium is also the foundational element of the criminal law, its distinguishing factor, and can justify a restriction of a person s freedom. 51 The creation of criminal offences that fail to identify the grounds for its condemnation risks trivialising criminal sanctions and ultimately their deterrent effect. 52 When the criminal law is overused it will lose its distinctive stigma. 53 Besides, by emphasizing the moral harm of cartel behaviour public support for criminal sanctions may be strengthened. 54 A survey conducted in the UK in 2007 found that only one in ten supported incarceration, 55 although 63% did consider the conduct to be dishonest. 56 Strengthening agreement with the law by exposing the wrongfulness of cartel conduct and the great social and economic harm that is inflicted is likely to reduce the number of infringements. Internalisation of the norm would increase compliance. Yet, greater agreement with a criminal cartel offence may also indirectly increase deterrence, as Individual cartelists tend to predict the risk of detection and enforcement to be greater if they believed the law and its application to their conduct to be just ECHR, Article 5 in accordance with the Human Rights Act Peter Whelan, A Principled Argument for Personal Criminal Sanctions as Punishment under EC Cartel Law (2007) The Competition Law Review 7, Henry M. Hart Jr., The aims of the criminal law (1958) Law and Contemporary Problems 401, Sanford H. Kadish, Some Observations on the Use of Criminal Sanctions in Enforcing Economic Regulations (1963) University of Chicago Law Review 423, John C. Coffee, JR., Does unlawful mean criminal?: Reflections on the disappearing tort/crime distinction in American law (1991) Boston University Law Review 193, Stucke Morality and antitrust (n 14), Andreas Stephan, Survey of Public Attitudes to Price-Fixing and Cartel Enforcement in Britain (2008) Competition Law Review 123, Ibid, Beaton-Wells and Parker (n 5).

9 Global Antitrust Review a) The moral wrongfulness of cartel conduct The economic harm inflicted by cartels is essentially two-fold. Cartel agreements are set up to raise prices to a supra-competitive level to increase profits. The extra margin of profit that is made by raising the price above the normal competitive price is known as an overcharge. This uncompetitive wealth transfer from consumers to the cartelist is the first type of harm caused by a cartel. The second form of harm relates to the reduction in quantity resulting from the price increase. It thus refers to the units that consumers would have bought at the competitive price but are no longer consuming at the supra-competitive price. This loss of consumer satisfaction is described as a deadweight loss. 58 As colluding firms no longer compete with each other for customers, a loss of innovation and research and development is also often associated with cartels. The harmful consequences of profit cartels are thus clear. However, what makes an act morally wrongful is some intrinsic violation of a freestanding moral rule or duty, rather than the act s consequences. 59 Public recognition of cartel behaviour as morally wrong in itself is still remarkably low in the UK. Wrongfulness of the conduct should, therefore, not merely be explained as setting up and/or maintaining a cartel. For it is not possible for the law to begin with a forward-looking offence in order to enhance enforcement and, without more, expect it to be successful in sending backward-looking signals of moral censure. The law cannot pull itself up by its bootstraps in this way. 60 Instead, its wrongfulness should be explicated as breaching a well-established moral norm. Cartel conduct could be regarded as breaching the moral norms against stealing, deceiving, cheating or subverting the competitive process. b) Stealing Cartel conduct may be conceptualised as a form of stealing. Indeed, Joel Klein regards collusion as theft by well-dressed thieves. 61 Stealing is defined by Stuart Green as an intentional and fundamental violation of another s rights of ownership 58 Werden and Simon (n 23), Stuart P. Green, Lying, Cheating, and Stealing: A Moral Theory of White-Collar Crime (OUP 2006), Rebecca Williams, Cartels in the Criminal Law Landscape in Caron Beaton-Wells and Ariel Ezrachi (eds) Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart, 2011), Joel I. Klein, The War against International Cartels: Lessons from the Battlefront (Fordham Corporate Law Institute 26 th Annual Conference on International Antitrust Law and Policy New York, 1999) < Accessed 5 August 2012.

10 The real shortcoming of the UK cartel offence 62 in something that is capable of being bought or sold. 62 Firstly, what is stolen from the consumer is the overcharge. 63 Due to the higher price, consumers have less money to spend on other goods or services, so that the overcharge can be represented as something that is capable of being bought or sold. 64 Secondly, to meet the definition, the cartel victims must have a right to the overcharge. Some would argue that, provided it was a lawful transaction, the consumer lost his ownership right to the overcharge when he voluntarily paid the supra-competitive rather than the competitive price. However, if the cartel victim s right to the overcharge is recognised in private damages cases, then there is no reason why it should not be recognised here as well. Thirdly, the violation of the victim s right must be fundamental. Once the overcharge is transferred to the cartelists, the cartel victim is unable to exercise his rights in the overcharge, so that the violation of his right would be fundamental. 65 Lastly, the violation needs to be intentional. A direct intention is found in criminal law where the actor aims to bring about the result or believes that he can attain a goal by bringing about the result. 66 Executives may engage in cartels for different reasons. Some may simply fix prices to raise profits. They simply intend to obtain the overcharge, so that they would fit the former type of intention. Others may participate to achieve some other objective, such as preventing lay-offs, ensuring a promotion or to reconcile with their competitors after a damaging price war. 67 These price-fixers would then have the latter form of intention. c) Deceiving Cartel conduct could also be regarded as a deception. A deception essentially involves that a message is communicated, with an intention to cause a person to believe something that is untrue and a person is thereby caused to believe something that is not true. 68 While cartelists usually do not expressly state that their prices are competitive when they are not, such a message may be implicit in their conduct. If consumers assume that goods or services are competitively priced in the market, then the cartelists by offering their goods or services on the market and by keeping their price-fixing agreement a secret, may implicitly signal to 62 Green (n 59), Caron Beaton-Wells, Capturing the criminality of hard core cartels: the Australian proposal (2007) Melbourne University Law Review 675, Peter Whelan, Cartel Criminalisation and the Challenge of Moral Wrongfulness (2013) Oxford Journal of Legal Studied 535, Ibid, Ibid, Neil Warwick, The Psychology of Cartels (2012) New Journal of European Criminal Law 181, Whelan, Cartel Criminalisation and the Challenge of Moral Wrongfulness (n 64), 550.

11 Global Antitrust Review consumers that their prices are competitive when they in fact are not. 69 To date no empirical evidence exists that proves that consumers indeed presume that goods or services are competitively prices. Yet, such assumptions may well prevail, as a public survey found that 63% of the UK public regarded price-fixing as dishonest. 70 Such an assumption could also be regarded as a manifestation of the presumption of innocence. 71 Lastly, the intention to mislead can be grounded on the price-fixers efforts to conceal their agreement. 72 d) Cheating Alternatively, it could violate the moral norm against cheating. Cheating encompasses the situation where a person, X, intentionally seeks an [unfair] advantage by violating a rule that Y is believed to be obeying. 73 The rule violated by a cartel agreement is the Article 101 TFEU or Chapter I prohibition. To further meet the definition, the conduct must have sought to attain an advantage over another person or group. There are three potential victims of the price-fixer s cheating: his competitors, his customers and the final consumers of the cartelised goods or services. Adhering to the cartel prohibition involves a certain self-restraint on an undertaking, a restraint not to collude with competitors. By foregoing that selfrestraint the price-fixer obtains an advantage over those competitors that do adhere to the prohibition. The unfair gain is the [indulgence] in one s will]. 74 However, this unfair advantage only arises where X s competitors do follow the competition rules. Yet, for X to be able to profitably raise his prices, his competitors also need to participate in the agreement. Instead, the cartelist could be obtaining an advantage over his customers in a downstream market. Provided, that his downstream customer has not cartelised their own market, the customer would be adhering to the self-restraint of the prohibition that the cartelists does not, which would be the unfair advantage that the cartelist, X, seeks to obtain over its customer, Y. Lastly, the cartelist may also be regarded as obtaining an advantage over its final consumer. Unlike the previous situation where the cartelist and its downstream customer are both meant to adhere to the same rule, in this situation the consumer 69 Ibid, Stephan, Survey of Public Attitudes to Price-Fixing as Cartel Enforcement in Britain (n 55), Whelan, Cartel Criminalisation and the Challenge of Moral Wrongfulness (n 64), Ibid, Green (n 59), Whelan, Cartel Criminalisation and the Challenge of Moral Wrongfulness (n 64), 560.

12 The real shortcoming of the UK cartel offence 64 is not subject to exactly the same rule. Instead, there may be a breach of one in a set of different rules in the market place; the quid pro quo for expecting adherence to the rule of prohibiting cartel activity by the potential cartelist is the consumer s adherence to a different market-based rule, which she is capable of breaching (such as not submitting a vexatious complaint to the antitrust authorities). 75 Alternatively, the cartelist may be regarded as cheating himself. The cartelist would then be breaking the cartel prohibition, to gain an unfair advantage over himself. 76 The advantage that the cartelist gains is the extra profit margin that he makes when he colludes, as opposed to the lower profits from competitive prices. e) Subverting the competitive process Quite similarly, MacCulloch regards the wrongfulness to be the subversion of the competitive process. She argues that cartel behaviour is wrong in that the act of making or implementing a cartel arrangement denies the marketplace of the legitimate expectation of a competitive process. 77 The cartelist thus subverts the competitive system. This again assumes that society legitimately expects markets to be competitive. Arguably, the UK free economy, as Western economies more generally, is indeed based on an expectation of competition. Overall conceptualising cartel conduct as breaching the norms against cheating and subverting the competitive process fit best in the competition law architecture, with its focus on normal competition 78 or competition on the merits. 79 f) A spiral of delinquency The infringers efforts to conceal their conduct, in full awareness of its illegality further increases the moral wrongfulness. A spiral of delinquency 80 ensues, in which the already wrongful behaviour is aggravated by their determination to defy the prohibition and take steps to avoid detection. 81 III. The failure of the cartel offence in practice 75 Ibid, Green (n 59), Angus MacCulloch, The Cartel Offence: Defining an Appropriate Moral Space [2012] European Competition Journal 73, Case 85/76 Hoffman-La Roche & Co. AG v Commission of the European Communities [1979] ECR 461, para Case T-228/97 Irish Sugar v Commission [1999] ECR II-2969, para Christopher Harding and Julia Joshua, Regulating Cartels in Europe (2 nd edn, OUP 2010), Ibid.

13 Global Antitrust Review The background to the introduction of the cartel offence Prior to the introduction of the cartel offence, two cases that had attempted to try price-fixers under the common law were unsuccessful. Firstly, in Norris v US 82 the US authorities had requested the UK to extradite Ian Norris, a former chief executive of a company engaged in a cartel, to the US, where he faced charges for price-fixing. To be extradited the offence with which Norris was charged in the US had to also qualify as a criminal offence under English law. While the lower courts were willing to view the defendant s endeavours to conceal the cartel as dishonest and the price-fixing agreement as a common law conspiracy to defraud 83, the House of Lords rejected this view. The House of Lords did not consider secret price-fixing to be criminal under common law, without any aggravating circumstances, such as fraud, violence or intimidation. 84 The Court referred as far back as the case Mogul Steamship 85 of 1892 to strengthen this point. 86 Similarly, in R v Goldschield Group plc and others 87 the court held that price-fixing was not dishonest in itself and not an adequate ground for a conspiracy to defraud, yet it could be part of a broader conspiracy. 88 Following the failures under the common law, the Hammond-Penrose Report, 89 a White Paper, 90 and political pressure from the US DOJ, 91 the UK government introduced a cartel offence by the Enterprise Act 2002, to supplement and strengthen the system of administrative fines for undertakings already in place. 92 The main rational was to strengthen deterrence. 93 The introduction of the cartel offence marked a shift from a previous European style to a more distinctly American approach. 2. Criminalisation at national level within the wider EU enforcement architecture 82 Norris v United States of America [2008] UKHL 16, [2008] 1 AC Norris v United States of America [2007] EWHC 71, [2007] 1 WLR Norris (n 82), [21]. 85 The Mogul Steamship Case 23 QBD 598; [1892] AC Norris (n 82), [14] [21]. 87 R v Goldshield plc and others [2008] UKHL 17, [2009] 1 WLR Ibid, [18]. 89 Hammond and Penrose (n 7). 90 Department of Trade and Industry (n 18). 91 US DOJ, Press Release: Charles A. James Statement regarding proposed amendment to the U.K. s antitrust laws (Department of Justice, 28 November 2001) < > accessed 15 August IB v R, [2009] EWCA Crim 2575, [2010] 1 Cr App Rep 16, [21]. 93 MacCulloch, The cartel offence and the criminalisation of United Kingdom competition law (n 6).

14 The real shortcoming of the UK cartel offence 66 At the time of drafting the offence the relationship between national enforcement and the EC competition regime was in flux. There was significant uncertainty of how the European Commission s modernisation programme would reshape the EC s enforcement regime. 94 The OFT had carefully consulted the European Commission in order to ensure that the UK offence would fit properly in the EC enforcement architecture. 95 Yet, the drafters deliberately distanced the offence from Article 81 EC, now Article 101 TFEU, and the Chapter I prohibition of the Competition Act The modernisation regime, introduced Regulation No 1/2003, 97 which clarified that Member States are permitted to provide for criminal enforcement of Article 101 and 102 TFEU and their equivalents in national law. Article 5 holds that the competition authorities of the Member States shall have the power to apply Articles [101 and 102 TFEU] in individual cases [and] for this purpose, they may take decisions imposing fines, period penalty payments, or any other penalty provided for in their national law. 98 The phrase or any other penalty covers imprisonment, as envisaged by Article 12(3), which refers to custodial sanctions. 99 However, Member States cannot criminalise the enforcement of only their national competition laws. The principle of equivalence 100 requires that enforcement of EU law by national competition authorities or national courts must be at least equivalent to what is provided for the infringement of national law The original cartel offence When the cartel offence was initially introduced, s. 188 Enterprise Act 2002 held that an individual is guilty of an offence if he dishonestly agrees with one or more other persons to make or to implement, or to cause to be made or implemented arrangements between at least two undertakings that: fix prices, limit or prevent supply, limit or prevent production, divide markets or bid-rig. 102 The offence thus only captures hard-core cartel agreements and pursuant to section 189 only applies to horizontal agreements Mark Furse and Susan Nash, Partners in crime the cartel offence UK law [2004] 15 International Company and Commercial Law Review 138, Ibid. 96 Ibid. 97 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty [2002] OJ L1/1. 98 Ibid, Article 5 (emphasis added). 99 Ibid, Article 12(3). 100 Case Comet BV v Produktschap voor Siergewassen [1976] ECR 2043 para Wils, Is Criminalisation of EU Competition Law the Answer? (n 35), Enterprise Act 2002, s. 188 (before amendment). 103 Ibid, s. 189.

15 Global Antitrust Review Notably the offence does not directly refer to the Article 101 TFEU or the Chapter I prohibition. While, this was in part influenced by the uncertainty of the European Commission s modernisation plans, the greatest concern for the drafters were the Article 81(3) EC exceptions (now Article 101(3) TFEU) and the individual exemptions under s.4 of the Competition Act There was a concern that a direct reference to those provisions may impel defendants to raise arguments about the creation of benefits, 104 which would greatly complicate trials. Such complication would be unnecessary, particularly where the conditions for the Article 101(3) exception and the individual exemption under the Competition Act are unlikely to be met for hard-core cartels under the administrative procedure for undertakings. To emphasise the seriousness of the offence, the maximum penalty on conviction or indictment is five years imprisonment and/or a fine. 105 On summary conviction, the penalty is imprisonment for a term not exceeding six months and/or a fine. 106 a) Actus reus The actus reus of the offence is committed by an agreement to do one of the prohibited activities, so that it is one of preparation and organisation, not of materialisation. The agreement is therefore the pivotal element [of the actus reus] of the offence. 107 The meaning of the term agreement in competition law and English criminal law can be regarded to be compatible. In competition law the notion centres around the existence of a concurrence of wills between at least two parties. 108 Similarly, in English criminal law, an agreement is seen as a meeting of minds. 109 b) Mens rea The mens rea of the original offence was dishonesty. The Enterprise Act did not provide for a statutory meaning of dishonesty, so that the Ghosh 110 notion of dishonesty under common law was to apply. The Ghosh test consists of an objective and a subjective element. First, the jury must consider whether the 104 Hammond and Penrose, (n 7). 105 Enterprise Act 2002, s 190(1)(a). 106 Ibid, s 190(1)(b). 107 Julian Joshua and Christopher Harding, Breaking up the hard core: the prospects for the proposed cartel offence (2002) Criminal Law Review 933, Case T-41/96 Bayer AG v Commission [2000] ECR II-3383, para 69. Quoted with approval by the ECJ in Cases C-2/01 P, C-3/01 P Bundesverand der Arzneimittel- Importeure ev v Bayer AG [2004] ECR I-23, para Joshua and Harding (n 107). 110 R v Ghosh [1982] QB 1053; [1982] 3 WLR 110; [1982] 2 All ER 689; (1982) 75 Cr App R 154 (CA).

16 The real shortcoming of the UK cartel offence 68 defendant was acting dishonestly according to the standard of reasonable and honest people. If so, the jury must be convinced that the defendant realised that what he was doing was dishonest by those standards. 111 The dishonesty element was introduced to exclude benign or pro-competitive conduct from the ambit of the offence, and to signal the seriousness and the moral wrongfulness of the offence. Hammond-Penrose expressed that the dishonesty requirement would signal that the offence is serious and should attract a substantial penalty and it would go a long way to preclude a defence argument that the activity being prosecuted is not reprehensible. 112 The authors thus considered that by sending this message juries would be persuaded to convict and judges to impose strict sentences. 113 Harding and Joshua contend that the drafters may have introduced the dishonesty element out of an uneasy awareness that their definition of the actus reus was so confusing and elusive that dishonesty might give the jury something meaty they could get to grips with The original cartel offence can be considered to have been a failure To date there has only been one completed successful case under the original cartel offence. In this case three directors, Bryan Allison, David Brammar and Peter Whittle were prosecuted for their participation in the Marine hoses cartel. 115 The three had been arrested in the US, and in a push for the UK s first cartel offence precedent, the US authorities negotiated a plea bargain with the defendants and the OFT. Under the agreement the three would be returned to the UK if they plead guilty to the cartel offence. 116 Accordingly, the three plead guilty in the UK courts. Judge Rivlin in the Southwark Crown Court, however, imposed sentences notably longer than those negotiated in the US. 117 On appeal against the length of the sentence, the Court of Appeal reduced the terms. 118 Hallett LJ even indicated that, in the absence of the agreement, the court might have reduced the sentences even further Ibid, [689]. 112 Hammond and Penrose, (n 7), para Ibid, para Joshua and Harding, (n 107), Marine Hoses (Case COMP/39406) Commission Decision of [2009]< > Accessed 6 August US DOJ, United States v Bryan Allison, David Brammar and Peter Whittle (Justice, 12 December 2007) < > accessed 14 August Whittle [2008] EWCA Crim 2560, [2009] UKCLR 247, [11]-[13]. 118 Ibid. 119 Ibid, [31].

17 Global Antitrust Review A second success is due to follow soon. On 27 January 2014 the OFT announced that it had charged Peter Nigel Snee under the original cartel offence for his participation in the galvanised steel tanks cartel. 120 On 17 June, Mr Snee is reported to have pleaded guilty. 121 The case is likely to be regarded as a great achievement for the new Competition and Markets Authority (CMA). However, as this was another uncontested trail, its importance should not be overstated. Per contra, the first contested trial dramatically failed. Following the exposure that BA and Virgin Atlantic had fixed fuel surcharges on transatlantic passenger routes, as a result of Virgin s leniency application, four BA executives were charged with the cartel offence. 122 The case, however, fell apart even before the offence could really be tested. The OFT had largely depended on Virgin s lawyers to gather evidence for the case. 123 While the trial had already started some 70,000 new s in evidence were found, which previously were thought to have been lost. The OFT s critical procedural failures cause the trial to completely collapse. 124 The OFT s fiasco mainly resulted from its inexperience as a criminal prosecutor. 125 While, the original cartel offence has had some limited success, its success is solely attributable to the guilty pleas. Even though the one and only contested case never came to the point where the offence could actually be tried, the collapse of the case was so drastic that it harmed the legitimacy of the offence and the OFT as a prosecutor and reduced any threat of conviction, 126 thereby vitiating the deterrent effect of the offence and its main reason of existence. The original cartel offence can therefore be regarded to have failed in practice. 5. The problems of the dishonesty requirement 120 OFT, Press release 2014 Man faces charge in criminal cartel investigation (27 January 2014) < / / > Accessed 10 August Coroline Binham, Former MD pleads guilty in UK industry price-fixing case Financial Times (17 June 2014) < 5c4d05b6-f60f-11e3-a feabdc0.html#axzz3BJDlVdVg > Accessed 17 June Julian Joshua, DOA: Can the UK Cartel Offence be Resuscitated? in Caron Beaton- Wells and Ariel Ezrachi (eds) Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart 2011), Martin Hickman, BA price-fixing trial collapses after discovery of new evidence The Independent (11 May 2010) < /news/uk/home-news/bapricefixing-trial-collapses-after-discovery-of-new-evidence html > Accessed 10 August Joshua (n 122), Andreas Stephan, How dishonesty killed the cartel offence [2011] 6 Criminal Law Review 446, Ibid.

18 The real shortcoming of the UK cartel offence 70 Even if the OFT had handled the prosecution of the BA executives more effectively, the cartel offence was doomed to fail. The dishonesty requirement was inherently flawed. Firstly, the dishonesty requirement was intended to operate as a filter, ensuring that only the most serious cartel agreements would be prosecuted. However, in competition law the seriousness of an infringement centres on the harm that is inflicted, rather than the defendant s state of mind as under Ghosh, so that dishonesty is a completely ineffective filter. 127 Secondly, the dishonesty element was included to preclude defence arguments that the conduct was not reprehensible. However, rather than avoiding defences, the element may invite them. Under the second subjective leg of the Ghosh test, a defendant may try to raise a defence that at the time of committing the offence he believed he was acting honestly according to the standards of ordinary honest people. He may thus try to raise a Robin-Hood defence, 128 by arguing for instance that in a time of economic downturn he participated in a cartel to avoid layoffs. As the judge is barred from directing the jury on what dishonesty means, 129 the jury may be persuaded to find that the second condition was not met. Lastly, the dishonesty element was meant to signal the moral wrongfulness of cartel behaviour. Yet, in this regard the drafters also critically misunderstood the operation of the Ghosh dishonesty test. Rather than developing new community norms, the first element of the test seeks to reflect current norms. 130 As there is no clear broad consensus in the UK that cartel conduct is dishonest, 131 a trial under the original offence may even fail at this first step. The drafters thus seemed to have fallen foul of the bootstrap problem. All considering, the drafters of the original offence seem to have failed to grasp the subtle notion of dishonesty in English law and may have been misled by a deceptively simple name for a complex concept. 132 III. A lack of public and political support 1. The underlying problem: a lack of public support 127 Brent Fisse, The Cartel Offence: Dishonesty (2007) 35 Australian Business Law Review 235, Angus MacCulloch, Honesty, Morality and the cartel offence (2007) 28 European Competition Law Review 353, Joshua (n 122), Ibid, Stephan Survey of Public Attitudes to Price-Fixing and Cartel Enforcement in Britain, (n 55). 132 Anthony Arlidge, Jacques Parry, Arlidge and Parry on Fraud (3d ed, Sweet & Maxwell 2007), para

19 Global Antitrust Review Although the problems encountered with the dishonesty element implicate that it was ill-advised to include the requirement in the offence, the real issue at the heart of these complications is a lack of public support for the offence. The lack of support in the courts can be seen prior to the introduction of the offence in Norris 133 and Goldschield 134 in which the House of Lords did not consider cartel behaviour to be dishonest of itself. This attitude prevailed post introduction. In Whittle 135 the judges of the Court of Appeal were very benevolent to the defendants, depicting them to each be of good character and empathising with their loss of livelihoods and the strains on their families. 136 This was reflected in the court s readiness to reduce their sentences. The public survey conducted in 2007 confirms that support for the cartel offence is generally lacking under the British public, as only a small majority considers cartel conduct to be dishonest and only one in ten supported prison sentences The 2013 amendments: a lack of political support In response to failed BA prosecutions, the Government decided to amend the cartel offence 138 by the Enterprise and Regulatory Reform Act 2013 (the Reform Act ). To remedy the issues raised by the dishonesty requirement, the element was removed from the offence. 139 To counter the wider scope of the new offence, several exclusion and defences were introduced. Under the new notification exclusion an individual will not commit an offence if it notified its customers of the arrangement prior to them agreeing to purchase the goods or service. 140 The new publication exclusion provides that an individual will not commit an offence if relevant information about the arrangement is published, in the manner specified by an order by the Secretary of State, before the arrangement is implemented. 141 The Reform Act retains the bid-rigging notification exclusion, under which an individual will not commit an offence if the person requesting bids is given relevant information about 133 Norris (n 83). 134 Goldschield (n 87). 135 Whittle (n 117). 136 Ibid, [29]. 137 Stephan Survey of Public Attitudes to Price-Fixing and Cartel Enforcement in Britain, (n 55). 138 Department for Business Innovation & Skills, Growth, competition and the competition regime: Government response to consultation (2012). < >, Enterprise and Regulatory Reform Act 2013, s 47(2). 140 Enterprise Act 2002 as amended by the Enterprise and Regulatory Reform Act 2013, s 188A(1)(a). 141 Ibid, s 188A(1)(c).